In the good books
ASX (ASX) was upgraded to Hold from Lighten by Ord Minnett
Ord Minnett looks at some key issues investors should look for in the interim result. In the broker’s view, ASX has reached the bottom of its earnings and the broker expects to see some rebound in FY22. Rating is upgraded to Hold from Lighten with the target price reducing to $73.78 from $77.28.
CHALLENGER (CGF) was upgraded to Add from Hold by Morgans
The normalised profit (NPAT) for Challenger was -2-3% below Morgans expectations, due to a -50 basis point decline in the life cash operating earnings (COE) margin. The broker notes this margin is expected to be assisted in the second half when excess liquids are further invested. Morgans sees FY21 as the bottoming out of earnings and moves to an Add rating from Hold. The target is decreased to $6.72 from $6.80. The analyst lowers FY21 and FY22 EPS forecasts by -4% and -7%, respectively, mainly reflecting higher net book growth assumptions, offset by reduced COE margin forecasts.
See downgrade below.
CHAMPION IRON (CIA) was upgraded to Neutral from Sell by Citi
Citi raises benchmark iron ore forecasts to US$140 and US$110 per tonne for 2020 and 2021, respectively. The broker believes the higher-for-longer iron ore prices will benefit Champion Iron and upgrades to Neutral from Sell. On Citi’s modelling the share price is implying a long-term benchmark iron ore price of US$65/t versus its forecast of US$60/t.
COCHLEAR (COH) was upgraded to Hold from Lighten by Ord Minnett
After an encouraging first-half update and positive feedback from the US, Ord Minnett is confident Cochlear will a report a strong earnings recovery led by market share gains and flat operating costs. No guidance is expected. Earnings estimates have been increased by 8% in FY21 and 7% in FY22. Cochlear will report its first-half FY21 result on February 19. Rating is upgraded to Hold from Lighten with the target rising to $200 from $175.
DETERRA ROYALTIES (DRR) was upgraded to Neutral from Sell by Citi
Citi upgrades its rating to Neutral from Sell with a target of $4.50. Citi highlights Iron ore prices rose 80% in 2020 to nine-year high levels of US$177/t before moving back to US$150/t. The broker expects prices to rise to US$165/t over the next 3 months before falling to US$140 in 2021. Deterra Royalties will report on a fiscal year basis and report first half results on 24 Feb. Citi expects earnings of $26m but notes this will be a tricky result since the first half will have a different incorporation date (15 June 2020) and implementation date (2 Nov 2020). Citi forecasts a first half interim dividend of $0.02 with full-year dividend expected to peak at $0.22 in FY23.
G8 EDUCATION (GEM) was upgraded to Neutral from Underperform by Macquarie
Macquarie reviews sector conditions and upgrades to Neutral from Underperform. Feedback from the industry signals improving occupancy with some potential for limited price increases. This is offsetting rent and sector funding, where there is limited appetite from financiers that may affect divestment plans. The broker upgrades 2020 earnings (EBIT) by 5%, adjusting its model such that earnings per share are reduced by -11%. EPS estimates for 2021 and 2022 are raised by 161% and 21%, respectively. Rating is upgraded to Neutral from Underperform and the target is raised to $1.20 from 85c.
MOUNT GIBSON IRON (MGX) was upgraded to Buy from Neutral by Citi
Citi raises 2020 and 2021 benchmark iron ore price forecasts to US$140 and US$110 per tonne. Since the beginning of the year the Mount Gibson share price has fallen -15%. Along with large earnings revisions this causes the broker to upgrade the rating to Buy/High Risk from Neutral/High Risk. Target is raised to $1.20 from $1.10.
In the not-so-good books
CHALLENGER (CGF) was downgraded to Neutral from Outperform by Macquarie
FY21 guidance for normalised net profit remains in a range of $390-440m, despite lower rental abatements. First half results slightly missed expectations. Macquarie notes the life division missed consensus forecasts by -6%, although this was broadly offset by strength in funds management. Given the slower rebound of life margins, the broker downgrades to Neutral from Outperform. Target is raised to $6.30 from $4.60 to reflect the stronger life balance growth from institutional sales over the longer term.
See upgrade above.
CROWN RESORTS (CWN) was downgraded to Neutral from Outperform by Macquarie
Crown Resorts has been deemed unsuitable for the Crown Sydney licence and Macquarie assesses the pathway to obtaining approval is onerous and may take two years. The broker believes the NSW casino inquiry report brings into question the company’s suitability to operate both the Melbourne and Perth casinos. Nevertheless, Macquarie expects Melbourne and Perth gambling will continue without hindrance. As there is a high level of risk and uncertainty as to how the company will manage the pathway to approval going forward, the broker downgrades to Neutral from Outperform. Target is reduced to $8.30 from $11.00.
GALAXY RESOURCES (GXY) was downgraded to Underperform from Neutral by Credit Suisse
December quarter production met full year guidance. Record sales were a positive, Credit Suisse notes, but a further improvement in recoveries is required to reduce costs. No sales price was disclosed. 2021 production is guided at 162-175,000t, 55% above the prior year. This assumes full plant throughput at Mount Cattlin from the second quarter. Credit Suisse downgrades to Underperform from Neutral on valuation grounds. Target is raised to $2.10 from $1.30. The broker notes the updated feasibility study on Sal de Vida is due for release in the June quarter.
HARVEY NORMAN HOLDINGS (HVN) was downgraded to Hold from Accumulate by Ord Minnett
Ord Minnett downgrades its recommendation on Harvey Norman to Hold from Accumulate due to the lack of valuation support. Target rises to $5.50 from $5.25. The broker expects Harvey Norman’s underlying pre-tax profit for the first half to be up 91% at $545.7m. The broker awaits more comments on the tailwinds from rising home investment and the extent to which this can moderate sales and margin declines.
PILBARA MINERALS (PLS) was downgraded to Neutral from Outperform by Credit Suisse
Credit Suisse downgrades its rating to Neutral from Outperform with the target rising to $0.95 from $0.40. The broker expects lessons learned over the past 24 months including a period of significant lithium oversupply leading to low utilisation rates and prices to translate into more controlled future expansion. Even so, the likelihood of going back to a period of extreme oversupply and price depression is considered low by Credit Suisse. Pilbara continues to be the broker’s preferred pick.
The above was compiled from reports on FNArena. The FNArena database tabulates the views of seven major Australian and international stockbrokers: Citi, Credit Suisse, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS. Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.
